Here's my take on the situation in Singapore. I believe we will enter into another global recession in 2013. The reasons are:
1. The US is in a fiscal cliff. Next year, tax cuts for the rich expires. That's good. But spending will be capped as the budget deficit hits another ceiling. In order for the government to raise the ceiling, there has to be horse trading. A Republican President will be able to extend the tax cuts for the rich and perhaps even extend the debt ceiling, so that there won't be any cuts in defence spending (be prepared for more wars!). If Obama gets re-elected, he will have a tough time asking for the debt ceiling to be raised because the Republicans controll the house. To continue spending and raising the debt ceiling, he will have to extend the tax cuts for the wealthy and not cut spending on defence. Either way, even if the debt ceiling is raised, whoever wins the election this Nov will want to start balancing the budget. Obama, if he wins, will want to balance the budget, if necessary get another recession out of the way so that the US economy will be recovering by the next Presidential election in 2016. If Mitt Romney gets elected, he will surely want to cut spending on consumption right away, risk a recession and blame it on the previous administration. 2013 doesn't bode well.
2. The Eurozone is still in crisis. A lot depends on whether the Greek government that's elected in June 17 agree to the bailout terms. Whichever way, if Greece continues to ask for bailout, and Germany and the Eurozone's inflation rises, it will come to a point that even France will want Greece to leave. It may occur this year or 2013, or even 2014. Then there will be a massive QE in trillions to bailout the affected banks in the rest of Eurozone. We will survive this crisis and it will be a great buying opportunity because valuations are very cheap. Equities may become cheaper than even in 2008 by then.
3. China's economy is rapidly cooling off but their inflation is still high. It's between the devil and deep blue sea. The adjustment period where China transform to a more consumer driven economy will take 5 to 10 years. Mean time, I think we will muddle through 2012 and 2013, if not 2014 too.
Against this backdrop, Singapore's residential real estate seems in danger of a big correction. Rental yields at 2.5 - 3% look attractive only because interest rates are zero, and borrowing costs are 1 to 1.5%. But you have to remember that in 2007, borrowing costs were 4.5%. Many people will start to throw their properties in 2014 when and if interest rates start rising.
I'm not saying that Singapore residential, or indeed any kind of real estate will not rise. But the return to risk ratio is not good. At most our property index will rise 10% to 15%. The drop could be 10 - 30%.
Mr Cheng: 'So where do the foreigners go to now? They go to strata industrial, office, shops and shophouses. So when you fill up the hole on one side, a new hole pops up on the other side!'
'Tactical policies must have a sunset clause because they are enacted to deal with certain dislocation of market forces. It's a temporary phenomenon, and if you don't remove the policy as fast as possible when the problem no longer exists, you're creating a distortion yourself ...'
- Mr Cheng
[SINGAPORE] Just as pent-up demand saw housing prices shoot up over the past few years, a reverse situation could be at play now, says Wing Tai chairman Cheng Wai Keung.
People are bringing forward their decision to buy property as they fear prices may rise. As a result, demand in subsequent years may be lower than what is projected based on current demand. This could worsen an oversupply situation. "On top of that if the economy is not so good at that time, it will compound the problem," says Mr Cheng in an interview.
"The current housing cycle has lasted longer than I expected," he adds. "The effects of five rounds of property cooling measures have been short-lived. And despite the fact that the government has increased supply for so many years, the property market has not subsided. This means the pent-up demand is more than I expected."
He attributes this to a cocktail of past undersupply, Singapore's population growth and liquidity.
"In 2003, 2004, 2005, when the economy was not so good, only people who really needed property would go out and buy. The people who were concerned about whether their jobs are secure tended to delay their purchase and that was why after the global financial crisis, all of a sudden, demand shot up in 2009, 2010 and 2011.
"Now, it's the reverse. Because of liquidity, people feel more secure, and even though the government continues to say that the economy is not doing well, apparently Singaporeans are still confident in general. Now some people may be bringing forward their buying (decision), thinking: 'I'd better buy now because prices are going up'.
"But my argument is that there is a danger of people bringing forward their demand, so subsequent years' demand may be lower than what they call average demand every year (based on current demand statistics).
"This will create an even bigger supply and demand inequilibrium; it will create an oversupply more than we think."
Analysts have also attributed strong property demand since 2009 to investors' distrust of financial instruments following Lehman's collapse. Strong liquidity and low interest rates and the onset of inflation have made property investment all the more alluring.
In addition, developers have also taken to minting small apartments to keep lumpsum investment size affordable, to draw a wider buying catchment.
Mr Cheng also acknowledges that global liquidity is a problem. "This is speculative flow of money, which is no good in the long run but we as a country have no way of preventing that. We are just a follower of the global liquidity. Nowadays, all countries are all for themselves. They don't care for other people. So whether this printing of money will affect other countries, nobody cares. They want to save themselves first. We as a small country, can't prevent that."
Mr Cheng says that he understood the government's measures to cool the property market but has a suggestion. "Government policies, especially tactical policies, must have a sunset clause because they are enacted to deal with certain dislocation of market forces.
"It's a temporary phenomenon, and if you don't remove the policy as fast as possible when the problem no longer exists, you're creating a distortion yourself, the other way."
He also says that because Singapore's economy is now more complex than when he arrived in Singapore nearly four decades ago, any policy introduced today may have unintended consequences.
He cites the example of the introduction last December of the 10 per cent additional buyer's stamp duty on foreigners buying any residential property here.
"So where do the foreigners go to now? They go to strata industrial, office, shops and shophouses. So when you fill up the hole on one side, a new hole pops up on the other side!"
